Inherited a Traditional IRA From Your Spouse? Here Are Four Options
If you lose your husband or wife, the last thing you’ll want to deal with is making decisions about what to do with the assets they left to you.
While it’s not something that any of us like to think about, understanding your options ahead of time can simplify your life, help you avoid undesirable tax consequences, and let you focus on healing during a most difficult time.
If your spouse was the original IRA account holder, was under age 72 and died before 2020:
1. Take a Lump-Sum Distribution of the IRA Assets
The most straightforward option. You’ll receive the assets via check or electronic transfer into your regular bank account.
Pros
- Money in your pocket in a fairly short period of time
- There is no 10% early withdrawal penalty
Cons
- The full distribution is considered taxable income
2. Spousal IRA Transfer
With this option, you transfer the assets in your spouse’s IRA to your own IRA (either an existing or a new one).
If your spouse was over 72, you must take a required minimum distribution (RMD) for the year in which they died (assuming they didn’t already take one).
Pros
- You won’t pay any taxes if you transfer 100% of the assets from your spouse’s IRA to yours
- The assets will continue to grow, tax-deferred, in your IRA
Cons
- You must be the sole beneficiary of your spouse’s IRA to do this
- You will pay a 10% early withdrawal penalty if you take a distribution from the IRA before you reach age 59 ½ (excluding the RMD for the year of death if your spouse was over age 72)
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3. Establish a Life-Expectancy Inherited IRA
With this option, you open a new Inherited IRA in your own name and transfer your spouse’s IRA assets into it.
Pros
- You will receive annual distributions over the course of your single life expectancy. The annual distribution amount is determined by your age in the calendar year following the death of your spouse and is recalculated each year thereafter.
- If your spouse was over age 72, the annual distributions are spread over your single life expectancy as explained above, OR their remaining life expectancy–whichever is longer
- There is no 10% early withdrawal penalty on distributions
Cons
- You must begin taking required minimum distributions (RMDs) from the account each year (the later of December 31 of the year in which your spouse would have turned 72, or December 31 of the year following the original account holder’s death).
- Distributions from the account are considered taxable income
- If your spouse’s IRA had multiple named beneficiaries, each one must establish an Inherited IRA by December 31 of the year following the year of your spouse’s death. Otherwise, the distribution amount will be calculated based on the eldest beneficiary
4. Establish a 10-Year Inherited IRA
Similar to option 2, you open a new Inherited IRA in your own name and transfer your spouse’s IRA assets into it.
Pros
- You can delay taking distributions from the account until 12/31 of the tenth year after the year in which your spouse died–which allows your assets to continue growing, tax-deferred
- There is no 10% early withdrawal penalty on distributions
Cons
- After the 10-year deadline described above, you must take a full distribution of all assets in the account
- Distributions from the account are considered taxable income
Note that the above scenarios apply only when you inherit a traditional IRA from your spouse.
Next week, we’ll cover your options for inheriting a Roth IRA from your spouse, as well as what your options are as a non-spouse designed IRA beneficiary.
In the meantime, if you have questions about inherited IRAs (or anything else related to retirement), our advisors would be happy to chat with you. Click here to schedule a free, no-obligation appointment with one of them.
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